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How have various asset classes performed during previous wars

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North Korea, the dictator ruled nation has been threatening the US and its allies with a possible missile attack, which may also have a nuclear warhead on it. The experts are divided on the actual capability of North Korea to undertake the attacks, however, its leader, Kim Jong-un leaves no opportunity to provoke the US and its allies.

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Key points

  1. Stocks perform better than average when the conflict starts
  2. Gold rallies before the start of the conflict
  3. Bonds have underperformed stocks during previous wars
  4. The US dollar has fallen on few occasions during a conflict
  5. The current war, if it starts, can severely impact electronic goods
  6. The US national debt is likely to balloon if US involves itself in South Korea’s reconstruction after the war ends

Though North Korea’s military prowess is nothing great to write home about, it can still cause extensive damage to millions of civilian lives and the economy of its neighbor South Korea, to some extent Japan and the US territory of Guam. However, in this article, we shall restrict ourselves to the impact of the war on various asset classes and the world economy. We shall use the historical evidence to arrive at our conclusion.

How does the US stock market perform during wars?

The US has fought several wars since 1960 as shown above. While a few ended quickly, others have been a long-drawn affair. Notwithstanding, Barron’s has outlined the effect of the following seven major hostilities on the Dow Jones Industrial Average since early 1980s.

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Serial No War Year
01 The US invasion of Grenada 1983
02 The US invasion of Panama 1989
03 The first Gulf War 1991
04 The US bombing of Kosovo 1999
05 The US War of Afghanistan 2001
06 The second Gulf War 2003
07 The US bombing of Libya 2011

Source: Barron’s

The markets hate uncertainty; a proof of this is the average 0.6% drop in the Dow a month prior to the start of the conflict.

However, once the conflict commenced, the Dow quickly turned direction, rising 4% in the first month. The rally did not stop there. Over the next three months, the Dow rose an average 6.7%, and the gains swelled to 7.2% after six months of the start of the conflict.

Therefore, if history repeats itself, a war between the US and North Korea – if it were to happen – will not start the next bear market.

How does gold perform during wars?

Gold is considered as a safe haven during times of uncertainty. Therefore, the yellow metal has rallied from about $1260/toz to about $1360/toz levels, as tensions escalated between North Korea and the US.

But, will gold continue its rally if the war starts?

Economists at Capital Economics have analyzed gold’s performance since 1985, during military conflicts, acts of terror and political tension.

They established that “over the past forty odd years, the price of gold has on average risen by 4.1% in the six months prior to a conflict turning into a full-blown war. However, it barely moved in the months following the event. This makes sense as gold thrives in periods of elevated uncertainty and the start of an armed conflict partly erases that.”

Performance of long-term bonds during wars

Though bonds are also considered as a safe haven investment, their performance has lagged their historical average during wars, according to a study by the CFA Institute. The possible reasons are an increase in inflation during war times and the second is the higher borrowing by the government to fund the war. Due to these two, bond prices fall. Therefore, selling out of stocks and buying bonds fearing a conflict might not prove to be a good strategy. The only aberration was during the gulf war when bonds beat stocks, albeit marginally.

How does the war affect the US dollar?

The evidence of the past three decades shows that the US dollar weakens during war, according to Kathy Lien, Managing Director of FX Strategy for BK Asset Management. The US dollar fell 5% when the Libyan war started and fell 9% during the first three months of the second gulf war. The dollar was weak even during the first gulf war.

However, this time, the situation is more complex and a lot of currency movements will depend on whether China actively involves itself in the war or remains neutral. The Australian dollar, the New Zealand dollar, and the Japanese Yen will see large moves if China supports North Korea directly during the war, else the movement in the currencies is likely to be comparatively subdued.

“As the tensions grow the dollar will suffer and the actual announcement of war could take USD/JPY to 105 but if it’s a swift victory the pair would also recover quickly,” said Kathy.

Though historical evidence gives us some idea about the possibilities, every new war is different because it involves different nations and affects different asset classes.

What sectors will be affected if a war with North Korea takes place?

Commodities

North Korea, in itself, can’t impact commodity prices. However, it is surrounded by nations that are major consumers of commodities. China is one of the major consumers of commodities, however, it is unlikely that the war will impact China’s consumption materially.

South Korea is a major importer of coal and exporter of steel. Both these commodities will be majorly impacted because South Korea will be severely affected if a war breaks out. Similarly, liquified natural gas prices will be affected, as Japan is its largest importer in the world.

The seaborne trade will also be severely affected because China, South Korea, and Japan receive about one-third of the global seaborne crude supplies. Similarly, 84% of the world’s iron ore and 47% of the metallurgical coal reaches the shores of these three nations through the seaborne route.

The agricultural commodities will also be affected because China is a major importer of rice and soybeans while Japan is of corn.

Economic costs of the war

War has both a direct and an indirect impact on the economy. South Korea is a hub for manufacturing liquid crystal displays, semiconductors, and cars. A war will impact these activities, leading to a shortage across the globe. The alternative suppliers can’t bridge the gap in such a short span of time.  Therefore, prices of various electronic products are likely to rise significantly, which will impact the developed economies, including the US.

“U.S. spending on electronic items, including smart phones, cameras, tablets and computers accounts for roughly 1 percent of the consumer price inflation basket. If a war in Korea caused prices of these items to double, it would add 1 percentage point to U.S. inflation,” a report by the research consultancy Capital Economics warned, reports CNBC.

If inflation rises sharply, the Central Banks will be forced to raise interest rates, jeopardizing the fledgling global economic recovery.

Additionally, if South Korea’s gross domestic product (GDP) falls by about 50% due to war, it will reduce the global GDP by 1 percentage point, according to the report.

Once the war ends, South Korea will need huge capital to rebuild its infrastructure. If the US involves itself and ends up spending the same amount as it did in Iraq and Afghanistan, then the federal debt will reach 105% of GDP, the economists at Capital Economics warned.

Conclusion

Though historical evidence suggests that the equity market returns are better than average during a war, the situation might be different this time because of the nations involved. Any jolt to the weak economic recovery across the globe will dent the confidence of the investors. Therefore, we don’t expect the stock markets to rise substantially during the war.

Gold’s performance is somewhat neutral and it can be used to protect the value of the portfolio. Therefore, selling some overvalued stocks and buying gold might be a good strategy if a war seems imminent.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 9 rated postsRakesh Upadhyay is a Technical Analyst and Portfolio Consultant for The Summit Group. He has more than a decade of experience as a private trader. His philosophy is to use technical analysis for momentum trading and fundamental analysis for long-term positions. Rakesh likes to keep himself fit by lifting weights and considers himself to be a spiritual person.




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Analysis

Silver Prices Poised for a Breakout – Overview of Key Trigger Levels

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Long-Term View

  • Since 2003, silver has exhibited spectacular volatility, increasing by more than ten-fold by the 2011 peak, before declining by more than 72% by end of 2015. Despite the volatility over this 15-year period, the commodity has found support on several occasions at a key long-term trendline (green trendline; retests – green arrows in Figure 1). More specifically, silver bounced off the support in 2008, 2015, and most recently in 2017 (green trendline currently at $15.50).
  • For 2 years (2011- early 2013), silver found support just around the $26 level, before finally breaking below and plummeting in April 2012 (blue horizontal trendline; sell signal – last blue arrow).
  • While, it can be said that silver, similar to gold, has been forming a large inverse H&S pattern since 2013 (neckline – yellow trendline), silver is further away from giving a buy signal based on this potential development. It is really the short-term view that reveals a well-defined pattern, whose completion may give a timelier signal.

Figure 1. Silver (XSLV.X) 8-Day Chart 

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Short-Term View

  • Zooming in, the daily chart reveals a strong support in the $15.50 – $15.80 area (violet line at $15.70). Notice how when the commodity broke below $15.50 for the first time, it moved sharply lower, before finding support at the long-term support discussed in the long-term view (green arrow). Within a couple of trading sessions, silver was back above $15.50.
  • A much more well-defined inverse H&S pattern is observed on the daily chart (lows – orange ellipses, neckline – orange downward sloping trendline, target – orange vertical line).

Figure 2. Silver (XSLV.X) Daily Chart  

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Implications

  • A break above the neckline of the small inverse H&S will activate an upward target of $21.75. Furthermore, such a breakout would trigger a buy on the larger inverse H&S.
  • While, a potential buy signal on the longer-term view may generate a target close to $28, the $26 level is expected to serve as a major resistance (i.e. resistance at $26 should take precedence over most other technical developments).

Outlook

  • Neutral with a bullish bias.
  • If silver breaks the orange trendline (a close above $17.80 should be used as a trigger) outlook will shift to bullish.
  • If the commodity breaks below $15.50, outlook will shift to bearish, as that would imply that both the $15.50 – $ 15.80 support area (violet trendline) and the long-term support (green trendline) have been breached.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Commodities

Is Oil About to Spike Again?

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The recent attack on Syria by U.S. and ally forces has raised the prospect of another major spike in oil prices, according to JPMorgan Chase & Co. Oil, already at more than three-year highs, could be poised for another 10% gain in the short term.

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JPMorgan’s New Outlook

The U.S. multinational investment bank recently issued a forecast calling for $80 a barrel oil, citing an expanding presence of Western forces inside Syria as well as the threat of new sanctions on Iran, a major oil-producing nation. Brent crude, the international futures contract , closed at $72.58 a barrel on Friday for a weekly gain of 8.2%. A price point of $80 a barrel would put Brent at roughly 70% of mid-2014 levels.

U.S. counterpart West Texas Intermediate (WTI) rose 8.6% during the course of the week to settle at $67.39 a barrel.

“Risks we thought might materialize this summer through Iran sanctions are emerging somewhat more quickly due to events in Syria,” JPMorgan strategists led by John Normand wrote on Friday.

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U.S., British and French missiles pounded Syrian targets early Saturday in response to an alleged chemical weapons attack carried out last weekend. U.S. President Donald Trump declared “Mission accomplished” shortly after the blitz, which included 105 missile strikes fired on three targets.

While it is unclear what the response will be once markets reopen on Monday, the Trump administration has indicated the missile strikes were not a recurring event. That said, Washington’s ambassador to the United Nations Nikki Haley said the U.S. forces are “locked and loaded” to carry future attacks if the Syrian government uses chemical weapons again.

Syria and Russia have both denied that a regime-led chemical weapons attack took place and no conclusive evidence has been brought forward on the matter.

The Case for Commodities

JPMorgan analysts aren’t the first to declare commodities a good investment at this stage of the business cycle. Strategists at Morgan Stanley have noted that energy stocks have historically been a “very consistent late-cycle outperformer,” which puts them on firm footing to beat the weakening bull market.

The energy sector has rebounded sharply from the multi-year downtrend in oil prices, but has severely underperformed the S&P 500 Index this past year. The $3.8 trillion worth of energy stocks represented on the S&P 500 have gained a mere 1.7% over the past 12 months, compared with a 13.3% return for the broader index.

Commodities like crude oil and gold are also benefiting from a weak U.S. dollar. The closely-watched dollar index (DXY), which tracks the greenback’s performance against a basket of six currencies, is down 2.5% this year. The dollar posted negative returns in 2017 and in January was off to the worst start to a year in over three decades.

In addition to energy stocks, the following oil-related portfolio recommendations were put forward by JPMorgan:

  • Long WTI call spread
  • Long Brent calendar spread
  • Overweight the S&P 500 Energy Index
  • High-yield energy credit
  • U.S. versus euro five-year inflation-linked bonds
  • Long Canadian dollar versus Japanese yen

However, gold may be the more attractive bet over the long term as geopolitical risks and rising U.S. shale production squeeze oil prices. Even the strategist at JPMorgan said the $80 a barrel price point would likely only be good for three-to-six months before U.S. producers flood the market again. As we’ve mentioned before, U.S. crude producers can make profits with prices as low as $40.

The current risk-off environment could also boost the appeal of cryptocurrencies, which are said to offer store-of-value characteristics. It has been argued that volatility and ‘FUD’ (fear, uncertainty and doubt) have masked the intrinsic value of crypto assets during the latest downtrend. Given that the underlying fundamentals have only changed for the better, a more sustained rally in crypto assets could strengthen portfolios struggling with the late-cycle blues.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.5 stars on average, based on 354 rated postsSam Bourgi is Chief Editor to Hacked.com, where he specializes in cryptocurrency, economics and the broader financial markets. Sam has nearly eight years of progressive experience as an analyst, writer and financial market commentator where he has contributed to the world's foremost newscasts.




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Analysis

Analysis: Gold Continues Oscillating, on the Verge of a Major Signal

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Long-Term View

  • In 2015, gold found support at its 2008 peak (resistance-turned-support in Figure 1 – white trendline; GLD chart shown).
  • In August 2017, the commodity broke above a key resistance (violet trendline), which subsequently served as support on two occasions in October and December of 2017 (violet arrows).
  • Gold has formed a large, multi-year inverse H&S pattern (lows – yellow ellipses, neckline – yellow downward sloping trendline). 2017’s failed attempt to break the neckline (yellow arrow) confirmed the importance of the trendline, even if the observed pattern does not prove to be an inverse H&S. In 2018, the commodity has oscillated sideways, going above and below the trendline several times (see Short-Term View).

Figure 1. GLD 6-Day Chart  

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Short-Term View

  • The commodity has been trading in a horizontal channel since January 2018 (blue horizontal trendlines), with an upper boundary roughly 1% away from 2016’s high.

Figure 2. GLD Daily Chart  

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Implications

  • While it could be argued that the neckline of the H&S has already been broken to the upside, given the commodity’s price action in 2018, one should wait for the short-term to align with the long-term view for a confirmation.
  • A break above the upper boundary of the channel will activate 2 targets. A conservative one (with a 4% upside) if the channel is considered to be a “trading range”. A more aggressive target (with a 9% upside) is obtained if the channel is considered to be a “flag”. A move above 2016’s high should be used as a confirmation of the breakout.

Outlook

  • Neutral with a bullish bias.
  • If the commodity breaks above its 2016 high (1,380 used as a trigger, just above the 2016’s high), outlook will shift to bullish.
  • If the commodity breaks below the lower boundary of the horizontal trading channel (using 1,300 as a trigger, just below the support of the channel), outlook will shift to bearish, at least in the very short-term

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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